For Us, The Living

by Robert Heinlein

  "Consider, if you please, two typical units of production, a factory and a farm. Let the factory be large, an employer with many employees; let the farm be small, a one-family affair. These two cases will be typical—insofar as price and purchasing power are concerned—of the entire economic organism. First, the factory: It makes, let us say, shoes. These shoes are placed on the market at a definite price. This price consists of two parts; the cost to the owner of the factory of making the shoes, plus a profit. The cost consists of a number of items, of which the principle are wages to employees, cost of raw materials, depreciation on capital goods, rent of land, interest on invested capital, and taxes. The additional portion of the price is the profit. This is the return to the owner or entrepreneur for his time, personal labor, ingenuity, and so forth, and is the source from which he must support himself and his family. To assume that profit is unnecessary is to assume that employers don't eat. It was popular in your day to attack the 'profit system'. We shall see that profits to an entrepreneur are not the cause of unemployment and financial distress. Of course there will arise the question of some entrepreneurs receiving a disproportionate amount of production as their profits, but that is a question of morals to be regulated according to the current customs. It does not in itself cause unemployment, as we shall see. As a matter of fact most persons who undertake the enterprise of new production, or entrepreneurs, did not make an excessive profit; most of them made no profit and went bankrupt. That is a simple matter of record. In your day eighteen out of nineteen businessmen failed in the long run. The groups who attacked the 'profit system' were beating a dead dog.

  "Nevertheless, since entrepreneurs must eat, profits are a legitimate part of the cost of production. Henceforth we shall include them as cost charges and consider that the necessary value of an article of production is its total cost, or cost to the entrepreneur plus his necessary profit."

  Perry interrupted. "Do you mean to say that the profit system in my day was okay? It seems to me that the profit system was always being attacked as the villain in the piece."

  "The profit system was not the villain in the piece. The villain was ignorance of the workings of the economic mechanism, in which the entrepreneurs or industrial leaders were the greatest offenders. At the very least the laborers knew that something was wrong and demanded a change, but the industrial entrepreneurs denied that any change was needed, and stubbornly resisted change with the ignorant willfulness of a Marie Antoinette. Furthermore they possessed the economic and political power to resist change. In that way they were the villains and were responsible for all the tragedy of your era. But let's not condemn them too heartily, as they were ignorant and stupid rather than innately vicious.

  "But now let's prove the statements I have made. Let's put this factory into operation and see how a cycle of production and consumption works. I mentioned a shoe factory. That will give us too limited a case to understand the whole industrial system. You understand the mathematical principle of the general case, the one in which all possible factors appear. Consequently any individual problem can be solved if you can solve the general case. Of course you do, very well then, let this factory be the general case of any production unit in the country which employs labor and uses capital. Its raw materials will be the materials it processes even though those materials have previously been processed after leaving mother earth. Thus steel plate or tanned leather may be termed raw material for automobiles factories and luggage factories. The term factory includes buildings and chattels of every sort used in production but which are not themselves the goods produced by the factory. Land includes the sites of buildings, rights of way, and so forth. Do you follow me?"

  Perry nodded. "Sure. It's like any algebraic general case, like the general quadratic equation for instance; ax squared plus bx plus c equals zero gives a general solution of x equals negative b plus or minus the quantity the square root of b squared minus four ac all divided by 2 a. Substituting the conditions of a particular case gives the answer for that particular case." *

  [*ax2+ bx + c=0 x=-b±(√b2-4ac)/2a The full solution of this general problem of the second degree can be found in any textbook of primary algebra. The Author]

  "Exactly. Let's set up the general case of a production-consumption cycle under the rules of your period and work out a few problems. Then perhaps we shall see the principles involved and be able to state a general solution which will answer all our questions about economics."

  Perry scratched his head. "Look. That's all very well in simple algebra like quadratic equations, but in economics we deal with an indefinite number of unknowns and too many factors. How can we possibly do this?"

  "We'll cross that bridge when we come to it. All special cases in the actual world are complex, it is true, even in quadratic equations. But the general case may turn out to have pleasing simplicity. Let's try to formulate it, and see. Have you pen and paper? Let's write down our elements. What are they?"

  Perry thought. "A factory."

  "Yes."

  "The entrepreneur or industrialist."

  "Go ahead."

  "Raw materials, and labor, and land."

  "Continue."

  "Consumers."

  "That is right, but who are they?"

  "Everybody. All of the public."

  Davis nodded. "True, but this is the general case. What does that imply?" Perry looked puzzled. "I'll tell you, then. The consumers are the people you mention plus their dependents, and no others. Even retired people enter the picture as capitalists or dependents, as well as consumers."

  "Yes, I think I see that."

  "Each individual has a dual role, appearing both on the production side and on the consumption side. Even a child appears as a producer through his father and appears as a consumer of goods purchased by his parents. We can disregard dependents from here on as they are represented economically by the head of the family."

  "How does a widow living on insurance appear in the set up?"

  "As a consumer of earlier production of the deceased head of a family. We'll take that case up later when we are ready to deal with it. Let's get on with our set up. What else do we need?"

  "A bank or banks."

  "Yes, and bankers, stockholders, bank clerks, and so forth. Will you let me lump them together as a bank and a banker, remembering of course the collective nature of the terms?"

  "Okay, I guess."

  "Very well, then. Do we need anything else?"

  "Not that I can think of."

  "Was the United States an anarchy ?"

  "No, of course not."

  "Then we have the government, and all of the subdivisions of government, public servants, taxes, and laws, and the government as a consumer."

  "This grows complicated."

  "Not too complicated. Let's represent government, and all subdivisions, as 'US', which you can think of as 'United States' or as 'us', for in the United States the government is everybody taken collectively. Public servants work for 'US'. Now do we have all elements?"

  "How about farmers and professional men? They are certainly consumers."

  "Yes, that's true. The case of the farmer is simple. Economically speaking, he produces in the same fashion as the factory owner, using the same elements; labor, raw material, land, enterprise, and so forth. If he employs no labor but himself and his family, 'profit' should appear as a large item in cost, and labor wages as zero. It becomes simply a special case under the general case. The professional man appears as a different type of laborer when he is hired by a production unit, for example corporation lawyers. Professional men serving the consuming public directly appear in the production-consumption chain in a one-to-one relationship of transfer without destruction of purchasing power. When you pay a medical man ten dollars for advice, your potential power to purchase and consume doughnuts or automobiles is reduced ten dollars and that of the doctor is increased by ten dollars. There is another element we have not named however. Can you guess it?"


  "Mmmmmn—no, I'm afraid not. It seems to me we've covered the—Wait a moment. Technique! Knowledge."

  "Exactly. Most knowledge is free to all of us. But some things are patented or copyrighted. Let's call the owners of techniques inventors. Now we are ready to roll. If we set up our hypothetical domestic economy so that it is structurally similar in every way to the economy of your period, it should work like your period. If we change the man-made laws to those of this present period, it will work like this present period. The natural laws involved remain the same structurally. If we can distinguish between man-made rules and natural necessity, we will know what we can and what we can't do with an economic system."

  "How can we make any such complicated set up in our heads and be sure that it will work out in practice, Master Davis?"

  "I shan't ask you to carry all of the moving elements of a complicated function in your head. Let's make a model. I see a set of chess men over there. May I use them? They will do nicely for people. Now have you anything I can use for counters?" Perry rummaged around and produced a box of poker chips. "Gaming chips? That's fine. Now we need something to represent the goods we are to produce and consume. What do you suggest? I'll need a number of units, a hundred or more."

  "How about a box of crackers?" suggested Perry.

  "A happy thought. Distinctly consumption goods. But we would get crumbs all over the table and they are rather bulky. Do you have any playing cards?"

  "Surely." Perry arose and returned with them. "Here are a couple of packs."

  "Very well. Let each card represent one unit of production of equal value. They represent all sorts of items; clothing, food, air cars, games, stereo records, books, and so forth. For convenience we split them up into equal-valued units. Now take the chess men and give them their functions. The black king is our entrepreneur, industrialist, or farmer." Davis wrote this on a slip of paper and tucked it under the base of the black king. "There. We will know him when we see him.

  "You will notice that his tag reads 'Entrepreneur-Consumer' to remind us of his dual function. The black queen is his wife. Place her with him. Put a pawn with them as their children. Now another pawn for her father who is dependent on them. He's a crusty old gentleman who hasn't worked since McKinley was shot and thinks the country is going to hell. The white king is the banker. We'll write a tag for him, 'Banker-Consumer'. This box you keep the chess men in will do as a bank, and this book can be a factory. Put tags on them, but don't place the factory on the table yet. It has not yet been built. The black bishop owns the land on which the factory is to rest. He must first be satisfied. The white castle owns a process to be used in our manufacture of playing cards. Now take five or six pawns and mark them 'Laborers-Consumers'. Mark the black horses 'Owners of Raw Materials-Consumers'. Take the white bishops and mark them 'Government Employees-Consumers'. Take a separate tag and mark it 'US' but don't place a chessman on it, as we must not personify the government. 'US' is all of us, acting collectively.*

  [*The reader is urged to make this set up and play it through as he reads. Otherwise the value of the demonstration will be lost. If chessmen are not available; bottles of ink, spools, tin soldiers, and so forth, will serve. Beans, dominoes, or marbles will serve as counters. The Author]

  "Now we are ready to run through a typical economic cycle. Call it one eon in length and let it be the time from the building of the factory until it is depreciated in value to zero and is obsolete. Something around twenty years if you must think in definite terms, but it isn't necessary to do so. Suppose you identify yourself with the entrepreneur, Perry, and I'll play the other pieces. You see a demand for playing cards and determine to manufacture them. You have your eye on a suitable site which you can lease at a reasonable price, and you know of a new process that you can buy up. But you haven't the working capital, all of your wealth being tied up in tangible property which you don't want to liquidate. So you go to the banker and ask for a loan of a hundred shekels. You explain your idea and offer security worth quite a bit more than a hundred shekels. From where we sit we see that the bank contains only twenty shekels, the capital reserve required by law. One might think that the banker would say, 'Sorry, Old man. You've got a sound proposition and I'd like to accommodate you, but there isn't that much money in the bank.' But he says nothing of the sort; he lends you the money. How does he do it? You give him a promissory note saying:

  Dear Banker,

  I.O.U. 100 shekels at 10% per eon.

  Signed, Entrepreneur

  He enters that on the books as a bank asset, credits your account with one hundred shekels, gives you a bank book, and some blank checks, and you thank him for the money, which is new money, monetized by your security and existing only as bookkeeping entries. To symbolize this I hand you these hundred chips, which you must think of as bank credit, or check book money, not as greenbacks, nor metal coin. But you may use them as money in every respect for the banker will cash a few of them from time to time out of the small stock of cash he keeps on hand. He can afford to do this because only on rare occasions will all holders of bank credit ask for cash all at once, placing a run on the bank. Usually cash money paid out by the bank comes back the next day and is re-deposited.

  "You have your hundred shekels now and can commence operations. You lease a site for four shekels for the eon. Put four chips by the black bishop. You build your factory, eight shekels for raw materials, eight shekels for labor. Pay out your chips. Now pay the inventor four shekels for the use of his process. Your wages for labor during the eon amount to forty-four shekels. Pay it out. And for raw materials thirty shekels. You will have taxes of ten shekels during the eon."

  "I can't pay them. I've only two chips left."

  "Never mind. You'll be selling some playing cards soon, and can pay them as you go along. You now manufacture during the eon sixty-three playing cards. Stack them there by the factory. You need eight shekels profit in the course of the eon to support yourself and your family. You figure out what your market price must be for playing cards in order to accomplish this. What would it be?"

  Perry set down his expenses and added them up as follows:

  Land rent 4 shekels

  Factory (labor) 8 shekels

  ——"—— (material) 8 shekels

  Production (labor) 44 shekels

  ———"———-(material) 30 shekels

  Royalty to Inventor 4 shekels

  Taxes 10 shekels

  Profit 8 shekels

  Interest on loan 10 shekels

  126 shekels to be recovered as price.

  63 produced units to be sold; therefore price must be 2 shekels each.

  Perry looked up. "I get two shekels per card."

  "Correct. As you can see, I arranged the figures to give round numbers."

  "But I can't possibly sell sixty-three cards at that price. There are only ninety-eight shekels out there to buy my product."

  "Don't be in a hurry. Start selling and see what happens. We will assume this time that all these people that received money from you need all the consumption goods they can afford. Sell to them."

  Perry dealt out cards to 'Labor', 'Land owner', 'Inventor', and 'Owners of raw materials', and collected two chips for each card.

  "How many cards do you have left?"

  "Fourteen."

  "You have a lot of money on hand. Better pay your taxes."

  "Okay." Perry placed ten chips on 'US'.

  "Now I'll act for Uncle Sam and pay the public servants four shekels, buy raw materials for four shekels, and use two shekels to buy consumption goods from you."

  "Here you are." Perry handed Davis a playing card who placed it on 'US' and gave Perry the remaining two chips.

  "Now sell goods to 'Public servants' and 'Owners of raw materials'."

  Perry did so, handing out four cards and receiving back eight shekels.

  "Now pay the interest on your loan. You'll be doing so in the course of the time period."

/>   "Okay, here's ten shekels."

  Davis placed them in the bank. "The banker, with his family, clerks, and so forth, needs some consumption goods. Here are two shekels." Perry solemnly received them and proffered one card to Davis.

  "Now pay yourself your profit of eight shekels. Turn it over to your wife. She handles the money in your household. She takes it and spends it for consumption goods." Perry took eight shekels, placed it by the black queen, then picked it up again and placed it by the black king, and placed four cards under the black queen. Davis added a comment. "That operation is symbolic of thousands of wives of entrepreneurs spending their husbands incomes on all manners of goods produced in thousands of factories.

  "The eon is over. The cycle is finished. Your factory has depreciated to no value at all. I must remind you that your note is due at the bank."

  "Wait a minute. Why do you assume that the factory is now worthless?"

  "It isn't necessary. Had you figured for a shorter period, the cost item labeled 'Factory' would have been just the percentage of depreciation during the shorter period. There would have been a smaller number of articles manufactured, smaller items in all respects. The final cost per unit would have been the same, but we decided to run through a full cycle, from the beginning to the end of a producing unit. But come, come, you are stalling for time. What about my note? You owe me one hundred shekels."

  Perry counted up his chips and grinned at him. "You'll have to whistle for it. I have only ninety-two shekels. I have four playing cards you can have for the balance."

  "I've no use for playing cards. I'm a banker and I have your promise to pay."

  Perry shrugged his shoulders and did not reply.

  Davis continued. "Very well let's get on with the next stage of the game. You have four units of 'over-production' and can't quite pay your note at the bank. But your banker respects your ability. Your original security is still good, and the banker says that conditions are essentially 'sound'. He re-finances you to go into production again. You sign a new note, this time for one hundred and eight shekels and now have one hundred shekels to your account. But your banker cautions you not to be guilty of 'over-production'. You go away, feeling somewhat confused as you don't see where you made your mistake, but the banker must be right for you certainly were left with four playing cards that you could not sell. You decide that the market only requires fifty-nine cards instead of the sixty-three you produced. So you do it all over again, producing only fifty-five cards which with your carry over of four gives you fifty-nine to sell. What is the result?"